Developmental finance institutions’ decision-making criteria and the financing of new ventures in South Africa

Abstract

The South African government has established Development Finance Institutions to increase entrepreneurial activity and to aid in bridging the financial gap confronted by entrepreneurs. Despite the government’s initiatives to bridge the financial gap, total early-stage entrepreneurship activity rates are low. The Global Entrepreneurship Monitor (2020) reported that South Africa has one of the lowest total early-stage entrepreneurship activities, with lack of funding and education being cited as some of the contributing factors.

The study aimed to determine the extent to which the entrepreneurs’ human capital attributes significantly impact the decision-making criteria of Development Finance Institutions in South Africa. The human capital attributes reviewed in this study were the level of education, experience, skills and knowledge. The study aids in filling the gap that exists in Development Finance Institutions financing criteria in developing economies thereby contributing to budding entrepreneurs for funding their new ventures. A cross-sectional quantitative research methodology as adopted with convenience and snowball non-probability sampling methods used for data collection using an online questionnaire. Out of 118 responses that were received from small to medium enterprises, 74 were usable and indicated that they had been funded by government-owned Development Finance Institutions. Correlations test analyses were used to determine the significance of the relationship between identified constructs.

The study revealed that there is a positive relationship between the entrepreneurs’ human capital and the DFIs’ decision to finance, however, this relationship was not statistically significant. The findings assert that human capital does serve as a signal when funders are deciding to fund. The study contributes towards reducing the gap in the body of knowledge on the decision-making of DFIs. Thus, the study implicates and provides direction to the government and or policymakers to draft policies that will improve human capital levels of the population to enable increased entrepreneurship participation and contribute to the growth of the economy